Feasting on Fed Stimulus is Over for Stock Investors

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Stock market investors and financial advisors hungry for positive returns haven’t had to look much further than the “all-you-can eat” buffet presented by the Federal Reserve and politicians for the past several decades. Low-slung interest rates and trillions of dollars in economic stimulus fattened equity portfolios.

That all changes Tuesday when the Fed meets to raise rates, with a half-point hike in view by Chairman Jerome Powell.

Many analysts are expecting a rate increase at every Fed meeting in the second half of 2022 – with further hikes next year.

The Fed is in a no-win situation: Raise rates and stifle the economy or don’t raise rates and watch inflation continue to soar. The Fed’s cupboard is bare – either scenario will result in drastically diminished consumer spending, which leads to reduced corporate earnings and lower public company valuations. Many drivers of the inflation eroding American consumption cannot be cured by rate hikes – supply-chain issues, the war in Ukraine, rising rents, energy costs, food prices, and health care costs. In addition, higher wages in a hot labor market could create a floor in prices for some goods and services, or worse create a wage-price spiral. Producer prices continue to far outpace employment rate gains.